BSkyB was handed a reprieve by the competition watchdog after a ruling over the broadcaster's stranglehold on pay-TV movies was reversed. Photograph: David Jones/PA

BSkyB is to face no action from regulators over its monopoly of UK pay-TV film rights, after the Competition Commission decided that video on demand rivals such as LoveFilm and Netflix provide a vibrant market for consumers.

The decision marks a U-turn by the competition regulator, which provisionally determined last August that BSkyB's contracts with the six major Hollywood studios – Disney, Warner Bros, Paramount, 20th Century Fox, Sony Pictures and Universal Studios – were anti-competitive and needed to be weakened to allow rivals to flourish.

However, in March the commission signalled a change of heart after deciding it needed to extend the investigation to take into account the impact of Netflix launching a UK-subscription VoD movie service in January and the move by LoveFilm, which is owned by Amazon, to extend its rental-by-post model to offer a similar online service to customers.

The regulator has decided that as a result, consumers now have more choice. "Competition between providers of movie services on pay TV has changed materially and, as a result of these changes, consumers now have much greater choice," said Laura Carstensen, chairman of the movies on pay TV market investigation at the Competition Commission.

"For the purposes of our inquiry, the key effect of the market developments is that, as a result of the new options available to them, consumers' choice of pay-TV platform can more easily be decoupled from their choice of pay-TV movie service.

"As a result, Sky Movies no longer provides Sky with the advantage that it used to when competing with other traditional pay-TV platforms, like Virgin Media or BT Vision."

While the regulator has now dropped any proposal to act against BSkyB, it said that competition in the overall pay-TV retail market was ineffective.

However, the Competition Commission said it could not act on this as the scope of the investigation was limited to movies in the what was termed the first subscription pay-TV window only.

"Virgin Media strongly disagrees with today's provisional findings by the Competition Commission and continues to support its earlier findings of 2011 – that Sky's control of movie rights is restricting competition in the UK," said a spokeswoman for Virgin Media.

"The recent emergence of providers such as LoveFilm and Netflix has done nothing to impact Sky's advantage and we're currently working to better understand the reasons for the commission's decision as we consider next steps.

"The commission states very clearly in these provisional findings that competition in the wider pay-TV retail market remains ineffective."

In March, Reed Hastings, the founder and chief executive of Netflix, said he believed BSkyB should not have its movie channels regulated and that he was looking forward to a fair fight.

"We appreciate the Competition Commission's work and encourage it to monitor the situation to ensure that competition in the major studio deals area is real," said a Netflix spokesman, responding to the regulator's decision on Wednesday.

"It should raise concerns if no competitors are actually able to outbid Sky for major studio content in the coming year."

BSkyB recently announced it intended to launch its own VoD service called Now TV, which would include Sky Movies. Consumers would not have to have a Sky TV subscription to use Now TV.

A spokesman for BSkyB said: "We welcome today's revised findings. We have long argued that UK consumers are well served by strong competition between a variety of movies providers.

"We remain committed to innovating for customers so that we can make Sky Movies even better, building on developments such as Sky Anytime+ and Sky Go. At the same time, we're focusing on the launch of Now TV, which will offer consumers even more choice in this vibrant sector."

In April, Ofcom told the Competition Commission to stick to its guns and break Sky's hold on the pay-TV film market, arguing that the arrival of Netflix and LoveFilm had not altered the broadcaster's dominance.

A spokesman for BT said that the company is "disappointed" the Competition Commission did not act on its acknowledgement that the UK pay-TV market is still "ineffective".

He said BT still felt "locked out" of being able to offer the most recent films on subscription.

"We are pleased that the Competition Commission has acknowledged that competition in the pay-TV retail market overall is ineffective," he added. "It is disappointing that it has not taken the action available to it to deal with this problem."

"Like BT, new entrants are still locked out of the chance to offer their customers the most recent films on subscription. We cannot see how this is in the best interests of consumers and we intend to respond to the Competition Commission's consultation on this basis."

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